MEASURING AND DECLARING SOCIAL DIVIDENDS – A PLEA FOR SIMPLIITY

Abstract

As politicians push for comparative measures of value-for-money outcomes from public funds and a consulting industry emerges around the topic of how to value social returns, there is a danger that some form of standardised method of measurement will be imposed on agencies. The particular danger is that such a model would be expensive and unnecessarily complex to manage. What is needed is an appropriate and proportionate approach that focuses on corporate objectives rather than on generalised economic theory.There is no issue about the need to declare a social dividend: the case for every major service provider doing so is overwhelming – the problem centres on questions of proportionality and conformity.

In the public and voluntary sectors statistics relating to the direct economic costs and outputs of service providers are easy enough to find and understand but information regarding the social returns generated by such agencies is more opaque. Perceived difficulties in measuring intangible benefits have led many such agencies to avoid the ‘problem’ of declaring a social dividend.

Embedded in the notions of ‘public service’ and ‘not-for-profit’ is an implied assumption that generating a social return is an integral aspect of the organisation’s mission. Although many agencies such as those providing health care, environmental protection and housing services, make it clear that the generation of social returns is a key aspect of their business function, practitioners in these fields remain ambivalent about the issue of measurement. In particular, they fear the introduction of an expensive and unnecessarily bureaucratic approach that prioritises conformity of practice between agencies at the expense of internal managerial coherence.

The background

At the heart of the measurement ‘problem’ is the fact that although many social returns are real, they are intangible, difficult to measure and their receipt is directed at external interests (such as the wider community). Furthermore, many of the benefits are not received quickly but spread over the economic life of the debt generated to create them. By contrast, the investment needed to generate them is usually front-loaded, comes from one identifiable source, is tangible and can be measured precisely. This contrast between clear measurable costs and uncertain intangible benefits has resulted in a poor understanding of the social benefits of investment. This in turn has acted as a disincentive to invest in socially beneficial activities: as the old management adage has it – “What counts is what gets counted”.

A significant amount of work has already been produced by credible consultancy organisations and a number of service providers are in the process of piloting methods of calculating the social returns generated by their investments of time, talent and money. The issue is not “whether or not” service providers should measure the social value they create, but “how to do it”.

SROI (Social Returns on Investment) is an analytic tool developed by the New Economics Foundation to account for (and measure) a broader area of value outcomes than is captured by traditional economic calculations. In particular, it seeks to take into account the social, economic and environmental consequences of economic activity. Its key feature is that it values outcomes by using financial proxies so that value-for-money decisions can be made using monetary measures. Its application can demonstrate to potential funders and internal decision-makers that when social returns are taken into account, a proposed investment can have a multiplier effect on economic growth, generate welfare improvements and in many cases, bring about future cost savings for the organisation.

The measurement of social returns will always largely be a matter of judgement. Current techniques are designed to provide a transparent, clearly targeted and reasoned case for the calculation that does not make exaggerated claims. With the help of consultants, various economistic methods for identifying and quantifying social returns are currently being developed by a number of health and housing agencies. The Housing Associations’ Charitable Trust (HACT), for example, is currently experimenting with a model similar to that of the New Economics Foundation. This approach is more closely focused on quantifying the social impact of community investment and seeks to measure social returns in terms of enhancements in ‘wellbeing’

How best to take account of social value is now a real issue across Europe and is a topic of concern in all sectors of the economy. Commercial, public, voluntary and charitable organisations of all kinds and sizes are seeking appropriate methods of measuring the social impact of their activities as a means of building or maintaining competitive advantage in terms of market positioning, customer loyalty, government support, and public opinion. However, the social value debate throws up yet-to-be-resolved questions about the nature and scope of how to monitor and measure such returns at the level of the individual organisation.

The problem

In the context of the current debate, a real and present danger now exists. This danger stems from the existence of forces that could place unnecessary administrative burdens on organisations already struggling to respond to changes in economic conditions, client expectations and legal obligations. In short, there is a danger that the requirement to identify and quantify social returns will result in new monitoring and reporting obligations that are unnecessarily complicated and disproportionately expensive to administer.

Four linked forces are currently pushing organisations towards what might turn out to be inappropriate practices: (i) the desire to extend regulation; (ii) the assumed benefits of conformity; (iii) the desire to monetise outcomes; (iv) the interests of consultants.

One of the great hypocrisies of public life is the tendency of governments to extend central control over regulated service providers whilst at the same time declaring a commitment to deregulate, reduce the burden of red tape and embrace the principle of subsidiarity[1]. Experience indicates that the desire of central authorities to influence the behaviour of publicly funded agencies is deep-seated. This tendency stems partly from a perceived need to control public spending and to guarantee value-for-money from such spending, and partly from a desire to direct the work of social agencies to achieve political ends.

The general trend towards increasing central control has brought in its wake particular attitudes towards the question of “how” social returns should be measured. Two questionable ideas have emerged. The first is that there is a need to establish a high degree of conformity of practice between agencies. The second, linked to the first, is that outcome values should be monetised. These two requirements are rationalised by referencing the need for regulators to make performance comparisons between service providers.

Current accounting consistency across any particular economic sector or industry is managed by reference to a Statement of Recommended Practice (SORP). To ensure a degree of consistency across national barriers, the SORPs take some account of international practices – but their intention is to provide recommendations for how accounts should be kept, how financial reports should be presented and how to account for nationally focused, sector specific transactions.

Across the European Union, momentum is building for increased legislative and regulatory requirements with regards to the identification and measurement of social value. As there does not yet exist an agreed approach to the measurement of social returns that is equivalent to those used by the International Accounting Standards Board, the question arises about whether an equivalent ‘hard’ standard is necessary or advisable. It is perhaps understandable that “the Establishment” (in the form of politicians, regulators, civil servants and the accountancy profession) see the need to look to the IASB approach as a model for social accounting arrangements.

Current trends

Currently, within the four national regions of the UK, there is a diversity of approaches to the legal and regulatory requirements in this field. All four arrangements, however, operate within an emerging European framework. This framework currently centres on the EU’s Single Market Act II 43 that places an emphasis on the ‘social economy’ of the Union. In his report for HouseMark, Professor Richard Tomlins comments that, “There is a clear message from the European Commission that voluntary approaches to accounting for social value have not had significant success and housing providers should expect further legislation if its appetite for the generation of social value is not satisfied” (p.14).

To date, in three of the four national regions, government focus has been on commissioning and procurement practices – illustrated by the provisions of The Public Services (Social Value) Act 2012 for England and Wales (and its subsequent review by the Young Report), the publication of the Welsh Procurement Policy documents, and the Procurement Reform (Scotland) Act 2014. These measures, together with their various ‘toolkits’, concentrate on the social value that can be achieved by developing local economic networks. It is, however, clear that more general legislation and regulatory compliance rules are under consideration. Already, as part of the drive to encourage the creation of social returns, regulators are placing greater emphasis on the notion of “best value” in their VFM assessments. Best value organisations are those that commit to achieve the optimum returns (including social returns) from their investments rather than simply those prescribed by rules and regulations.[2]

What both the SROI and HACT approaches have in common is an attempt to present social and wellbeing benefits in the form of cash calculations. The logic of this approach is broadly two-fold. Firstly, it reduces a wide variety of social outcomes to a common measure and this makes it easier to determine investment priorities. Secondly, it gives the appearance of concreteness and precision, thereby reassuring boards of management, potential investors, and politicians that the organisation is contributing real social value to the communities in which it operates.

Once a particular measurement system becomes accepted (fashionable), history tells us that it will provide opportunities for consultants to earn fees by helping anxious organisations to embrace the emerging consensus about method. History also tells us that in the welfare sector, what starts as a voluntary commitment to adopt an assumed “best practice” arrangement eventually shifts to a mandatory system. This shift is both lobbied for, and facilitated by, consultancy firms that have a vested interest in the mandatory requirements being complicated enough to require the employment of their ‘expertise’.

An appropriate way forward

The commitment to create and then identify a social dividend is more cultural than technical. As the creating of social value becomes seen as an aspect of the agency’s core business (i.e. not just a ‘bolt-on’ to its statutory duties or traditional functions), it will of course have to be identified, quantified and declared. This does not mean that the process needs to be complicated nor does it mean that every element of the dividend should be given a monetary value.

The time and effort involved in creating and operating a monetised system can be disproportionately expensive. The presentation of value judgements dressed as precise monetary measures can provide decision committees with apparently pre-assessed decisions that inhibit further strategic thinking and planning. In some instances, cash measures can be misleading or even downright inappropriate.

A shift away from narrow cash costing to a form of opportunity costing could have a positive effect on rational policy formation. Such an approach would avoid the necessity of operating expensive quasi-accounting systems. It could also present information in a way that is less intimidating and easier to understand. Costing investment decisions by referencing the lost opportunities of alternative investments encourages a discursive approach to policy making. Although it may still require some form of financial calculation, this remains in the background and does not present policy committees with what appears to be a scientifically determined fait accompli – this makes it easier for decision groups and other stakeholders to question executive proposals and contribute to the policy debate.

Practitioners should avoid being imprisoned by the desire to fill every corner of the assessment with mathematical detail or be concerned to standardise a methodology that uses an inappropriate unit of account. The SROI Network believes that the lack of a standard approach to measurement is in itself not important and that the key to being able to compare different values is “consistency in the principles”.[3] In many instances, these, rather than unnecessarily precise indicators or values, will provide more meaningful measures. Furthermore, this approach can be flexed for different levels of rigour depending on the organisation’s purposes and stage of development. It is better to measure the right thing at the right time in a rough and ready sort of way than to ignore it or measure it with the sort of impressive refinement that is unnecessary, inflexible or misleading.

There is a case for applying a simple ‘residual’ approach to the measurement of what cannot be quantified easily (in cash and/or opportunity cost terms). This avoids the necessity of operating quasi-accounting systems that produce dubious and contested figures for intangibles. It also presents information in a way that is easily understood. Once the measurable has been quantified, the residual method then identifies other relevant intangible costs and benefits that cannot sensibly be given a meaningful cash or opportunity cost value. These ‘residuals’ are included in the declaration of social value as ‘positives’ or ‘negatives’. They can sometimes be quantified by referencing appropriate soft units of account such as ‘tenant satisfaction’, ‘numbers of people helped or harmed’, ‘reputational risk’, ‘staff morale’, etc. This straightforward approach should be regarded as ‘cheap and effective’ rather than ‘rough and ready’. It is not only simple to administer and easier to comprehend, but is appropriate to the needs of well-managed, innovative organisations.

Consistency in principles not practices

Social accounts record information that is different from that found in financial accounts and statements. The notion that every social cost and benefit should be included in the assessment and be afforded a cash value feels wrong and is wrong. The single-minded pursuit of quasi-financial accounts in this field could lead to the introduction of monitoring practices that are not only expensive and burdensome to administer but are also open to misleading interpretations. More work needs to done on how ‘soft measures’ can be blended into social value calculations in ways that produce less formulaic and more appropriate management tools that are less concerned with regulatory comparability and more concerned with stimulating a diverse range of creative thinking. A key factor in this approach should be accessibility – it should include reporting mechanisms that make real sense to all stakeholders.

Freedom within a framework

Ways of developing such a blended approach already exists in the methodology of cost-benefit-analysis. To be clear, incorporating soft measures into the monitoring arrangements (when judged to be appropriate) would utilize and adapt (not abandon) the excellent work already produced by HACT, the New Economics Foundation and others. What is needed, however, is for leading service providers themselves to generate ideas and flexible frameworks that others can consult and draw upon when devising their own bespoke systems for capturing the nature of their particular contributions to society. The author is currently working with a small group of social and commercial entrepreneurs to develop an approach to social costing that is in line with these principles and is happy to communicate with others who share his concerns.

[1] That argues that only those functions that cannot be provided locally should be taken on by the central authorities.

[2] See Garnett (2015) A-Z of Housing for discussion of ‘best value’, pp.202-8.